Return on Equity (RoE) : One of the trends observed in 2012 is a play on ROE.Most of the indian entities of MNCs like Hindustan Unilever and Colgate are companies with light balance sheets. Smaller share holder capital, smaller assets and giving good returns. They have been giving good dividends and that is one of the ways where they can please their masters sitting abroad. They remained the the flavor of 2012 due to good ROE and also riding on the renewed interest in FMCG business as such, completly ignoring the PE ratio and even the PEG ratio
Ratio Analysis : PEG Ratio
what does P stand for
Most of us are familiar with the price of a share (P).
what does E stand for
We should have also heard of its earnings per share (E).
The ratio of this two is the P/E of the stock.
A stock by itself CANNOT have a ’high’ or ’low’ PE!
Its always relative to something else (e.g., the industry average).
When you see the ’talking heads’ on CNBC speaking of high or low PEs, they are actually making incomplete statements unless they specify relative to WHAT.
But even this is not enough as the industry as a whole could be in a slump or growth phase.
To know if a scrip is ’fairly valued’ or not, we have to add another component.
what does G stand for
This is the earnings growth (G) expressed as CAGR over the number of years you want to go forward (usually related to the time frame of your position).
This is always a projection/estimate.
Now the good part, this PEG ratio as it is called can give a much better idea than pure PE about the valuation of any stock.
If the ratio is around 1 (say 0.9 - 1.1), the future earnings growth ’matches’ the current PE and the share is fairly valued (HOLD).
If the PEG more than 1, the PE is higher than the project earnings growth rate so the scrip is OVER valued (SELL).
If its less than 1, its UNDER valued (BUY).
Caution:
This ratio is more applicable for GROWTH (above market PE) as opposed to VALUE (below market PE) stocks.
What the PEG ratio is saying about Indian markets
The Sensex PEG ratio is at 0.85 in January, which looks set to be the third month in a row that it is under one, suggesting a buy signal
Peter Lynch in his investment classic, One up on Wall Street, recommends the price-earnings growth, or PEG ratio, as a means of valuing growth stocks.
This is different from valuing companies as a multiple of their earnings—the more commonly used price-earnings, or PE, multiple. A company with profits of Rs.100 crore and value at Rs.1,000 crore would have a PE multiple of 10.
There is a disadvantage to this. Companies whose profits are growing fast typically trade at higher multiples. This would mean that a fast-growing company which has a multiple of 15 may look more expensive than a no-growth company with a PE of 10. Lynch advocated dividing the PE ratio by expected earnings growth, thus arriving at the PEG ratio.
If growth is higher than the PE multiple, then the ratio would be less than one, signalling that a stock is inexpensive relative to its growth. It is considered expensive if the PEG is greater than one.
The Sensex PEG ratio has been under one since November. It is currently at 0.85. This looks set to be the third month in a row that the PEG ratio is under one, suggesting a buy signal. This is the longest stretch of such low valuations since 2013. It dipped below one on three separate occasions during 2013. There was a rebound after two months on each occasion.
The PEG ratio is calculated based on one-year forward PE estimates divided by long-term growth estimates. To be sure, any signal based on the PEG ratio comes with its own set of caveats. It paints a poor picture of stable companies whose high growth phase is behind them even though they may offer high dividend income. A low PEG may make a company look cheap, but this does not account for the high growth that India itself is going through relative to the rest of the world.
While the Sensex PEG indicates a buy signal, not everyone is convinced about future growth.
Dhananjay Sinha, head, institutional research, and economist and strategist, Emkay Global Financial Services, pointed out that markets trading at the lower end of earnings multiple should also be seen in the context of the fact that there has been little growth in earnings. He pointed out that analysts have been bullish on earnings only to downgrade them for a long time now, always postponing growth to the next year.
"Next year is a mirage," he said.
The past 12-month Sensex EPS (earnings per share) at the end of the September 2015 quarter was lower than the corresponding figure for September 2014. The same holds true for June and March. December quarter earnings, which are still coming in, are also lacklustre and yet another round of earnings downgrades may be around the corner.
Drastic steps will need to be taken before growth picks up, said independent market analyst Anand Tandon. "The government has to go out and spend like crazy…hope is not a plan," he said.
So are the markets cheap now?
Maybe not just yet.
PE Ratio : trailing PE vs Forward PE
EPS comes in two main varieties. Because there are two types of EPS metrics, there are also two most common types of P/E ratios: Forward P/E and Trailing P/E.
The first is what you see listed in the fundamentals section of most finance sites; it says something like "P/E (ttm);" ttm is a Wall Street acronym for trailing 12 months. This is a number reported as fact, based on the company's performance over the past 12 months.
The other type of EPS is found in a company's earnings release, which often provides EPS guidance. This is the company's best educated guess of what it will earn in the future.